What Beginners Need to Know About Buying Penny Stocks in 2021

Trading penny stocks in 2021 is all about understanding what to look for when buying small caps. While this may seem self-explanatory, there are a few nuances that many investors don’t consider when making a penny stocks watchlist. These factors are especially true when we think about the investing environment in 2021. 

As we all know, we are living in extraordinary times. With the pandemic, the rise of cryptocurrency, fears of long-term inflation and so much more, being an investor this year and last has not been easy. But, the key to making a profit with penny stocks is not only understanding what the various events going on are but how to use them to your advantage. 

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In the past six months, we’ve seen the rise of meme stocks and penny stocks on Reddit, Twitter and more, having a major influence on the stock market. This includes companies you may know of like AMC Entertainment Holdings Inc. (NYSE: AMC), BlackBerry Ltd (NYSE: BB), GameStop Corp. (NYSE: GME), and more. But, it also includes companies you may not have heard of as well. 

And while we’ve already covered ‘Penny Stocks for Beginners’, there are some other aspects to consider right now. So, whether you’re a seasoned investor or just starting on your penny stocks journey, these tips and tricks may be a benefit. 

7 Things All Penny Stocks Investors Should Know 

  1. How to Make a Penny Stocks Watchlist 
  2. Entering and Exiting Positions 
  3. Long Term Vs. Swing Trading 
  4. Speculation Vs. Fundamentals 
  5. Current Market Trends 
  6. Meme Stocks and the Impact of Social Media 
  7. Research and Trading Educations

1. How to Make a Penny Stocks Watchlist 

Making a penny stocks watchlist is something that we’ve covered numerous times. However, the strategy can change on a weekly basis. Right now, we have to consider that industries like Biotech, tech, and EVs are on fire among others. When forming a watchlist, investors need to consider both the ongoing trends and potential future trends.

The first step in this process is research. Put together a very broad list of a few dozen stocks you’re interested in. From there, the process of dwindling can begin. The best way to start is by looking at which penny stocks are the most volatile and which are not. Then, identify you’re own tolerance for risk. 

how to make watchlist

For example, a stock like Orphazyme ADR (NASDAQ: ORPH), which was a penny stock only a week or so ago, is extremely volatile. ORPH stock can rise or fall in the double or triple-digit percentage points daily. 

On the other hand, a company like Uranium Energy Corp. (NYSE: UEC), is relatively stable. In the past six months, shares of UEC stock have shot up by over 61%. However, in the short term, it managed to trade mostly sideways. With all of this in mind, making a watchlist is a great first step to investing in penny stocks. 

2. Entering and Exiting Positions 

buying and selling penny stocks

Learning how to enter and exit positions is one of the best things you can do for your portfolio. While it may seem straightforward, this is a step that many investors take for granted. One of the most popular strategies that investors tend to use is a gradual selling strategy. This involves buying a stock at a target price, and selling in different increments along the way. 

For example, let’s say shares are trading at $1 and your target price is $2. At $1.40, you’d sell 10% of your shares; at $1.60 you’d sell another 20%, at $1.80 you’d sell another 20%, and then at $2, you’d sell the remaining 50%. These are by no means concrete numbers, but the basic idea of this strategy allows investors to make every trade a potential winner. While there are plenty of other strategies to use, this is a relatively easy and accessible one for all traders to consider. 

3. Long Term Vs. Swing Trading 

Long-term trading and swing trading are two of the most popular methods of buying and selling penny stocks. These two categories cover almost all strategies that traders use. With penny stocks, swing trading or short-term trading tends to be a favored strategy. This is because stocks under $5 move extremely quickly, and can push up or down substantially in a given trading day. For this reason, many choose to buy when a stock is low and sell if it pushes up in a day or over a few days.

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On the other hand, we have long-term trading. This is less common with penny stocks, but something that we do see regularly. Long-term trading with penny stocks tends to start with an investor identifying a company that could have long-term potential. This could be due to the adoption of a product over several months or years, or a company moving out of penny stock territory. The term penny stocks simply means any stock trading under $5. Because of this, the options to find long-term value are almost limitless. 

4. Speculation Vs. Fundamentals

Speculation and fundamentals are two identifiers that can help to track movement. These are both witnessed as a major cause of price fluctuations with penny stocks and all stocks for that matter. Speculation is any news or outside events that are causing a price to move. This could be the announcement of a new balance sheet, a company update, or even a rumor spread on social media. 

penny stocks

With penny stocks, we tend to see speculation as the root cause of many price movements such as with companies like Hall of Fame Resort & Entertainment Co. (NASDAQ: HOFV). But, we also see this with blue chips like Tesla Inc. (NASDAQ: TSLA). Because speculation is the main impact on most fluctuations, it is extremely important to stay up to date with the news. 

Fundamentals on the other hand are all of the raw numbers that go into making a price move. This could be what’s in a balance sheet, any new financing deals, dilutive share measures, and more. While fundamental moves can lead to speculation, a stock can trade purely off of a fundamental reason. Again, this means constantly searching for the newest and most impactful events going on right now. 

Right now, there are plenty of trends at play in the stock market. This includes everything from Covid to the ups and downs of cryptocurrency and more. To keep it concise, let’s talk about these two factors in particular. As we all know, Covid continues to be one of the largest events in the market right now. 

While at first, it was relatively detrimental to prices, quickly it resulted in a large uptick in the market. As cases hit the lowest levels in months, many investors are looking for penny stocks to watch that will benefit. This includes biotech stocks, energy stocks, tech stocks, and more. With this trend, investors need to think outside of the box to understand what the end of the pandemic could do to certain industries. For example, with energy, many believe that the consumption of fossil fuels will rise dramatically as people begin to travel and commute once more. 

The next aspect to consider is the ups and downs of cryptocurrency. While crypto and penny stocks are two very different assets, because they tend to be relatively cheap (except for Bitcoin and Ethereum among others), they can trade in tandem with one another. And, there are also plenty of penny stocks that work in the cryptocurrency or blockchain industry, adding an even more volatile layer to their pricing. Considering these two factors, we see just how intensely the market can move depending on what is going on in the world. 

6. Meme Stocks and the Impact of Social Media

Meme stocks and the impact of social media on penny stocks is a trend that is impacting the market right now. Beginning with the GameStop fiasco a few months back, retail traders quickly saw just how much of an impact they have on the stock market. This is driven mostly by accessible trading platforms like Robinhood and WeBull. However, we also see the impact of social media such as Reddit and Twitter in the market

While it is nearly impossible to stay up to date on every stock being talked about online, investors can do their best. It is also important to consider that highly talked-about penny stocks on Reddit or other online websites, can be extremely volatile. If you are not 100% sure of your strategy, it may be worthwhile to sit back and spend some more time learning before inviting in meme stocks. 

7. Research and Trading Educations 

Research and trading educations are two of the best things you can do to achieve a higher chance of profitability. On one hand, thoroughly researching the ins and outs of a company will help to ensure that you know everything about a given penny stock. This means fewer surprises in both price movement and your portfolio. 

research penny stocks

Hand in hand with this is having a trading education. While strategies and learning how to trade can be done online, there are plenty of educational services out there. These services condense this into an easy-to-follow curriculum. While prices can be high, the knowledge is invaluable, and thus a crucial part of trading penny stocks. 

Many investors think that it is easy to throw a dart on a board and make profits with small caps. However, most will end up losing for some time until they learn that it is quite difficult. While having a trading education is not 100% crucial, it will always be a major benefit to you and your portfolio. 

What Do You Think About Investing in Penny Stocks in 2021?

Finding the best penny stocks to buy in 2021 can be challenging. But, with dedication and hard work, making a watchlist and seeing profits can be easier than previously imagined. With so much going on in the stock market right now, it can be a daunting task to stay up to date.

[Read More] 8 Penny Stocks in These 3 Industries Have Traders Looking to Buy

However, with the tips and tricks mentioned above, buying and selling penny stocks this year can be a major benefit to your wallet. With that in mind, what do you think about investing in penny stocks in 2021?


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